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1 Question 3 - Product line Analysis (29 marks) The owners of Mountain Sports Ltd. are currently reviewing a proposal to adopt a new product line - BMX Bicycles. This new product line will be compatible with the Mountain Bikes and open a new target market, younger customers. It is anticipated that the BMX line be introduced next spring 15% 4 Management has estimated the following: 5 Expected sales in bikes 430 Average selling price per bike $ 392.00 7. Purchase cost (CGS) per bike $ 137.00 8 Assembly cost per bike 5 58.00 Sales cleris required seasonal 10 Monthly Salary per Sales Clerk 5 1,176 11 Sales commissions 12. Advertising campaign annual cost) 5 4,112 13 14 The additional sales clerks required for the BMX line will only work for four months of the year (May to August). 15 Required Part A (Chapter 6) (13 marks): Prepare a CVP income statement (for a one year period to determine the segment 16 margin for the new BMX Bikes product line 17 BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 TAL Perhe BMX Product Line Budgeted CVP Income Statement For the year ended December 31, 2020 18 TOTAL Per Bike Percentage 430 1,68,560 S 392.00 $ 100% 19 20 Number of Bikes 21 Sales Revenue 22 Less: Variable Costs must be listed alphabetically) 23 Assembly 24 Cost of Goods Sold 25 Sales Commissions 26 Total Variable Costs 27 Contribution Marrin 28 Less: Fixed Costs must be listed alphabetically 29 Advertising 30 Salaries 31 Total Fixed Cost 32 BMX SEGMENT MARGIN 24,940 58.00 58,910 137.00 25,284 58.80 1,09,134 254 59.426 S 138.20 15% 35% 15% 65% 35N 4,112 9,408 13,520 45,906 33 34 Required Part B (Chapter 6 & 7117 marks): This new BMX bike product line will create an increase in sales of two departments: Accessories (refer to 0.2 segmented income statement for department information). However, due to the floor space required for retailing BMX Bikes, management estimates that sales of Mountain Bikes will decrease (hints remember that variable costs will also change when sales change) 35 36 Increase in Accessories Sales 12% 27 Decrease in Mountain Bikes Sales 491 > B D E What is the impact to the company's income as a whole if the BMX product line is added (hint: consider the segment margin of the BMX product line, and the impact to the other product lines. Remember that if sales change for a product line, the total variable costs will also change. Thus, contribution margin should be used in your calculations for the other product lines) 39 40 11 Increase in BMX Segment Margin $ 45,906 42 Increase in Contribution Margin - Accessories 18,056 Decrease in Contribution Margin - Mountain Bikes 43 (show as negative number) 8,976 14 NET Increase (Decrease) in Operating Income $54,986 Increase -45 46 DECISION: Should the company add the BMX bike product line? Yes 447 48 Why or why not? The company should add the BMX bike product line because with this line company on the whole can increase its operating income by $54,986. The profit from BMX product line is $45906. Although the Mountain Bikes sales would decrease by 4% but it is 49 still covered by the profit from Accessories and BMX 50 Required Part C. Pricing (Chapter 9) (9 marks) Assume management has decided to go ahead with offering the BMX product line. The owners of Mountain Sports are concerned about the ability of BMX to cover its fixed costs and provide a good return on investment (ROI). An investment is required for the necessary fixtures, display racks, and inventory. The owners have provided the minimum return on investment below. Use the cost information and unit sales provided in part A above to answer the questions below. Case Intro Q1 Q2 Q3 04 OS 06 50 Required Part: Pricing (Chapter 9) (9 marks) Assume management has decided to go ahead with offering the BMX product line. The owners of Mountain Sports are concerned about the ability of BMX to cover its fixed costs and provide a good return on investment (ROI). An investment is required for the necessary fixtures, display racks, and inventory. The owners have provided the minimum return on investment below. Use the cost Information and unit sales provided in part A above to answer the questions below. 392.00 2,03,000 12% 195 51 S2 Suggested selling price s 53 Required investment in assets $ 54 Minimum return on investment 55 56 Calculate the following: Unit product cost (costs incurred to get the bike ready s Total selling & administrative costs (costs that help sell S. 58 the bike or run the business as a whole) 59 Selling & administrative cost per bike $ 60 Desired return on investment per bike S 61 Markup percentage using absorption costing 62 Suggested selling price using absorption costing $ 57 for salel 38,804 90.24 56.65 759 341.89 3 Leasa intro01 02 03 04 05 06 61 Markup percentage using absorption costing 62 Surested selling price usine absorption costing s 75% 341.89 & Soaps 64 65 is the surrested selling price (noted in part A) sufficient to earn the required return expected by the Yes Are there any other considerations management should take into account before adding the product line? 69 90